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Journal of Finance and Accounting2013; 1(3): 41-45Published online October 20, 2013 (http://wwwsciencepublishin!!roupco"/#/#$%)doi:1011&4'/##$%2013010311

The relationship between capital structure and firm

performance: evidence from JordanKhalaf Al-Taani

ep%rt"ent o$ %n*in! + in%nce, %cult o$ in%nce + .d"inistr%tie ciences, rbid %tion%l niersit, rbid ord%n

Email address:*t%%ni6%hooco", r*t%%ni6inuedu#o

To cite this article:7h%l%$ .l-8%%ni 8he 9el%tionship between %pit%l tructure %nd ir" Per$or"%nce: idence $ro" ord%nJournal of Finance andAccounting. &3 w%s % contr%diction to tr%dition%l %ppro%ches which

su!!ests %n opti"%l c%pit%l structure (?odi!li%ni %nd ?iller,

1>&3) n re%lit, est%blishin! %n opti"%l c%pit%l structure is

% di$$icult t%s* (ho%ib, 2011) Ce contends th%t % $ir" "%

reAuire issuin! % nu"ber o$ securities in % "i=ture o$ debt

%nd eAuit to "eet %n e=%ct co"bin%tion th%t c%n "%=i"iDe

its %lue %nd h%in! succeeded in doin! so, the $ir" h%s

%chieed its opti"%l c%pit%l structure

ensen %nd ?ec*lin! (1>E&) de"onstr%tes the %"ount o$

leer%!e in % $ir"Bs c%pit%l structure %$$ects the %!enc

con$licts between "%n%!ers %nd sh%reholders %nd thus, c%n%lter "%n%!erBs beh%iors %nd oper%tin! decisions 8his

position is %!reed b C%rris %nd 9%i (1>>1); Fr%h%" %nd

C%re (2001); b%id (200>) ince ensen %nd ?ec*lin!Bs

%r!u"ent re!%rdin! c%pit%l structure in$luence on $ir"

per$or"%nce, seer%l rese%rchers h%e $ollowed this

e=tension %nd h%e conducted studies %i"ed %t e=%"inin!

the rel%tionship between c%pit%l structure %nd $ir"

per$or"%nce

Ghile the liter%ture e=%"inin! the per$or"%nce

i"plic%tions o$ c%pit%l structure choices is i""ense in

deeloped econo"ies li*e . %nd urope, little ise"piric%ll *nown %bout such i"plic%tions in e"er!in!

econo"ies li*e ord%n .s ldo"i%t (200E) %r!ues, c%pit%l

"%r*et is less e$$icient %nd inco"plete %nd su$$ers $ro"

hi!her leel o$ in$or"%tion %s""etr th%n c%pit%l "%r*ets

in deeloped countries 8his rese%rch %tte"pts to $ill the

!%p in this $ield b inesti!%tin! the e$$ect o$ c%pit%l

structure on corpor%te per$or"%nce usin! di$$erent

%ri%bles %nd % ti"e $r%"e th%t is considered "ost recent

when co"p%red with the rese%rches reiewed in this wor*

8he ob#ectie o$ this stud is to e=%"ine the i"p%ct

c%pit%l structure h%s h%d on the per$or"%nce o$ $ir"s in

ord%n peci$ic%ll, it is %i"ed %t: =%"inin! the

rel%tionship between c%pit%l structure, %nd 9eturn on .ssets

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42 7h%l%$ .l-8%%ni: 8he 9el%tionship between %pit%l tructure %nd ir" Per$or"%nce: idence $ro" ord%n

(9O.) %nd Pro$it ?%r!in (P?) %t% o$ 45 $ir"s listed on

.""%n toc* =ch%n!e (.) between 2005 %nd 200>,

representin! 225 $ir" e%r obser%tions would be used

$or the stud 8his stud will be si!ni$ic%nt to "%n%!ers in

decidin! the ri!ht co"bin%tion o$ eAuit %nd debt to

$in%nce their oper%tions %nd to "%=i"iDe $ir" %lue %t the

s%"e ti"e contributin! to the econo"ic deelop"ent o$

ord%n

8he rest o$ this p%per is %s $ollows: the ne=t section

presents rel%ted liter%ture %nd $ollowed b "ethodolo!

8he third section discuses rese%rch results onclusion %nd

reco""end%tions $or $uture rese%rches discussed in the

$in%l section

2. Literature Reiew

8he liter%ture on the rel%tionship between $ir"

per$or"%nce %nd c%pit%l structure h%s produced "i=ed

results o"e h%e been $ound % positie rel%tion between$in%ncin! choices %nd per$or"%nce (pro$it%bilit) 9oden

%nd @ewellen (1>>5) e=%"ines the c%pit%l structure o$ 4'

$ir"s durin! the period 1>'1-1>>0 %nd ree%led %

positie rel%tion between pro$it%bilit %nd c%pit%l structure

i"il%r results were docu"ented b h%"pion (1>>>) %nd

Fosh et %l (2000) C%dloc* %nd %"es (2002) su!!est

corpor%tions with hi!h leel o$ pro$it%bilit use hi!h leel

o$ debts n the other words, the show % positie rel%tion

between per$or"%nce %nd c%pit%l structure .bor (2005)

reports % positie rel%tion between c%pit%l structure, which

"e%sured b 8 %nd 8, %nd per$or"%nce oer the

period 1>>'-2002 in Fh%n%i%n $ir"s er!er %nd on%ccrsidi p%tti (200&) proide the s%"e results in%ll, .r%bi%n

%nd %$%ri (200>) inesti!%tes the e$$ects o$ c%pit%l

structure on pro$it%bilit usin! 100 r%ni%n listed $ir"s $ro"

2001 to 200E 8he $ound short-ter" %nd tot%l debts %re

positie rel%ted to pro$it%bilit (9O) while indic%te %

ne!%tie rel%tion between lon!-ter" debts %nd 9O

contr%st, seer%l schol%rs ree%led % ne!%tie rel%tion

between c%pit%l structure %nd per$or"%nce n this line,

7ester (1>'&) $ound % ne!%tie rel%tion between c%pit%l

structure %nd per$or"%nce (pro$it%bilit) in the %nd

%p%n i"il%r results were reported b riend %nd @%n!

(1>''), 9%#%n %nd Hin!%les (1>>5) in the F-E countries n

%ddition, Cu%n! %nd on! (200&) $ound % ne!%tie

correl%tion between leer%!e %nd per$or"%nce (e%rnin!s

be$ore interest %nd t%= to tot%l %ssets) in hin% $ir"s

eer%l studies show either poor or no st%tistic%l rel%tion

between c%pit%l structure %nd per$or"%nce (8%n! %nd %n!e,

200E; b%id, 200>) b%id (200>) inesti!%tes the i"p%ct o$

c%pit%l structure choice on per$or"%nce o$ &4 $ir"s $ro"

1>>E to 2005 in the !pti%n c%pit%l "%r*et Ce e"plos

three %ccountin! b%sed "e%sures; includin! 9O., 9O

%nd !ross pro$it "%r!in, %nd concludes c%pit%l structure

choices, !ener%ll, h%s % wee*-to-no i"p%ct on $ir"

per$or"%nce

%pit%l structure liter%ture h%s shown con$lictin! results%"on! rese%rchers o"e studies h%e shown th%t c%pit%l

structure h%s si!ni$ic%nce i"p%ct on $ir" per$or"%nce

while others h%e shown no i"p%ct Fener%ll, rese%rchers

%!ree th%t %n %ssoci%tion between c%pit%l structure %nd $ir"

per$or"%nce e=ist (Cun!, et %l 2002) Ghile so"e studies

h%e concluded th%t the rel%tionship between c%pit%l

structure %nd $ir" per$or"%nce is both positie %nd

ne!%tie (8s%n!%%o, et %l 200>; %eed %nd ?%h"oodi,

2011; .bor, 2005; O*e %nd .$ol%bi, 200') others concluded

th%t the rel%tionship is ne!%tie (%render, et %l 200E;

Pr%theep*%nth, 2011; h%h, et %l 2011; On%ol%po %nd

7%#ol% 2010; ho%ib, 200E) Iet, other studies h%e

docu"ented % positie rel%tionship (ho%ib %nd iddiAui,

2011; ."%n, 2011; howdhur, 2010; O"oro!ie %nd r%h,

2010)

Gith these "i=ed %nd con$lictin! results, the Auestion $or

e=%"inin! the rel%tionship between c%pit%l structure %nd

$ir" per$or"%nce h%s re"%ined % puDDle %nd e"piric%l

stud continues

!. "b#ecties

8he $ocus o$ this stud is "p%ct o$ %pit%l structure on

Per$or"%nce o$ the usiness industr in listed co"p%nies in

ord%n

8o ree%l the i"p%ct o$ c%pit%l structure on$in%nci%l per$or"%nce

8o e%lu%te the interrel%tionship between c%pit%lstructure %nd per$or"%nce

$. %y&otheses

8he $ollowin! hpothesis is $or"ul%ted $or the stud

C0; - 8here is % ne!%tie rel%tionship between c%pit%l

structure %nd $in%nci%l per$or"%nce

C1:- 8he c%pit%l structure h%s si!ni$ic%nt i"p%ct on

$in%nci%l per$or"%nce

C2: - 8here is % positie rel%tionship between c%pit%l

structure %nd $in%nci%l per$or"%nce

'. (ata and )ethodolo*y

8o produce the %boe "entioned rese%rch ob#ectie, the

d%t% $or this stud w%s !%thered $ro" the $in%nci%l

st%te"ents %s published b usiness o"p%nies n

%ddition, %nother source o$ d%t% w%s throu!h re$erence to

the reiew o$ di$$erent %rticles, p%pers, %nd rele%nt

preious studies or this purpose, collectin! d%t% o$

usiness $ir"s is used which %re listed on .""%n toc*

=ch%n!e .ll $ir"s %re t%*en $or the stud representin! the

period o$ 2005- 200>, %nd the %er%!e %lues o$ e%ch ite"

w%s considered $or the purpose o$ r%tio co"put%tion %nd

%n%lsis 8he popul%tion o$ the stud is "%de up o$ the 45

"%nu$%cturin! co"p%nies listed on .

8he d%t% obt%ined $ro" these co"p%nies were t%bul%ted

%nd %n%lDed usin! "ultiple re!ression "odels 8his

st%tistic%l techniAue is used bec%use the stud see*s toest%blish i$ there is % rel%tionship between c%pit%l structure

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ourn%l o$ in%nce %nd .ccountin! 2013; 1(3): 41-45 43

%nd $ir" per$or"%nce

5.1. Definition of Variables

hort ter" debt to tot%l %ssets (88.): 8his is %nindependent %ri%ble t is deried b diidin! short

ter" debt b tot%l %ssets @on! ter" debt to tot%l %ssets (@88.): 8his is %lso

%n independent %ri%ble t is deried b diidin!

lon! ter" debt b tot%l %ssets

8ot%l debt to eAuit (8): 8his is %notherindependent %ri%ble t is c%lcul%ted b diidin!

tot%l debt b eAuit

9eturn on %ssets (9O.): 8his is % dependent%ri%ble t is the Auotient o$ diidin! pro$it %$ter

t%= b tot%l %ssets

Pro$it "%r!in (P?): 8his is %lso % dependent%ri%ble t is the Auotient o$ diidin! pro$it %$ter

t%= b turnoer

5.2. Model Specification

8he rese%rcher %dopts the "odel used b ho%ib (200E)

%nd On%ol%po %nd 7%#ol% (2010) with little "odi$ic%tion to

suit the rese%rcherBs need 8he "odel is %s $ollows:

J $ (88., @88., 8)

P9 J$ (), b e=p%nsion,P9 J $ (88., @88., 8)

sin! "ultiple re!ression %n%lsis, the "odel c%n be

built %s $ollows:

P9 J b0 K b1 88. K b2 @88. K b3 8 K e

Ghere,

P9Jper$or"%nce (pro= b 9O., P?)

9O. J9eturn on .sset

P? J Pro$it ?%r!in;

J %pit%l tructure;

88. J hort ter" debt to tot%l %ssets;

@88. J @on! ter" debt to tot%l %ssets;

8 J 8ot%l debts to eAuit;0 Jthe const%nt, %nd

1, b2, b3, %re re!ression coe$$icients

+. Results and (iscussions

Table 1.Regression Result

,ariable oefficient T-tat i* ,I/ R-s0uare i* f- chan*e

onst%nt E43' 433> 0000 - 003> 0032

88. -0123 -2400L 01E 10E0

@88. -0150 -2133L 0034 14&E

8 0004 0E5E 0450 14&&

ependent %ri%ble: 9O.: O9; P t%tistics

8he t%ble %boe shows the re!ression result used to

eri$ the %ssoci%tion between 88., @88., 8 %nd

9O. 8he result indic%tes % ne!%tie rel%tionship between

88., @88. %nd 9O. while % positie rel%tionship

e=ists between 8 %nd 9O. 8his "e%ns %n incre%se in

88. %nd @88. b one will reduce 9O. b 123M %nd

15M respectiel while % unit ch%n!e in 8 will incre%se

9O. b 04M 92 is 4M which indic%tes hi!hl

insi!ni$ic%nt rel%tionship between the %ri%bles, %s >&M o$the %ri%tion is %ttribut%ble to $%ctors outside this stud

14&&

ependent %ri%ble: P?: O9: P t%tistics

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44 7h%l%$ .l-8%%ni: 8he 9el%tionship between %pit%l tructure %nd ir" Per$or"%nce: idence $ro" ord%n

8he t%ble %boe represents the result o$ re!ression used

to eri$ the rel%tionship between 88., @88., 8

%nd P? 8he result indic%tes % ne!%tie rel%tionship

between 88., @88, 8 %nd P? 8his "e%ns %n

incre%se in 88., @88., %nd 8 b one will reduce

P? b 2'M, 3>2M %nd 03M respectiel 9-sAu%re is20M

which "e%ns '0M o$ the %ri%tion is %ttribut%ble to $%ctors

outside this stud 1) %pit%l structure %ndin$or"%tion role o$ debt, ourn%l o$ in%nce, -355

N15

Cun!, I, .lbert, P %nd ddie, C ? (2002)%pit%l structure %nd pro$it%bilit o$ the propert %ndconstruction sectors in Con! 7on!, ourn%l o$ Propertnest"ent %nd in%nce, E&) 8he theor o$ the $ir":"%n%!e"ent beh%ior, %!enc costs %nd c%pit%l structure,ourn%l o$ in%nci%l cono"ics, '&) %pit%l %nd ownership structure: %co"p%rison o$ nited t%tes %nd %p%nese "%nu$%cturin!corpor%tions, in%nci%l ?%n%!e"ent,

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ourn%l o$ in%nce %nd .ccountin! 2013; 1(3): 41-45 45

N23 On%ol%po, . . %nd 7%#ol%, O (2010) %pit%l structure%nd $ir" per$or"%nce: eidence $ro" i!eri%, urope%nourn%l o$ cono"ics, in%nce %nd .d"inistr%tie ciences,ssue 25, pp E0-EE

N24 Pr%theep*%nth, P (2011) %pit%l structure %nd $in%nci%lper$or"%nce: eidence $ro" selected business co"p%nies in

olo"bo toc* =ch%n!e, ri@%n*%, ourn%l o$ %rts,cience %nd o""erce, >5) Gh%t do we *now %boutc%pit%l structure decisions: so"e eidence $ro" intern%tion%ld%t%, 8he #ourn%l o$ in%nce, >5) ) orpor%te %pit%lstructure decisions: eidence $ro" leer%!ed buouts,in%nci%l ?%n%!e"ent,